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Economist: US default not likely to occur

POSTED: October 10, 2013 12:59 a.m.

Congress has until around Oct. 17 to raise the debt ceiling or possibly face defaulting on America’s debts.

“Tax money comes in, and (Congress) spends it,” said University of North Georgia economics professor John Scott. “Here’s the thing: They spend more than they take in. And when they do that, we go in debt.”

The federal government has been in partial shutdown since Oct. 1, coming to a halt over funding of the Affordable Care Act. While Republicans and Democrats are going back and forth over the terms of ending the shutdown, the Oct. 17 debt ceiling deadline is casting a shadow over negotiations.

“They passed a law saying we’re going to limit the amount of debt we can go in,” Scott explained. “So they said, ‘We’re not going to go above this amount.’

“Of course, they do still overspend,” he added. “Since it’s the law that they can’t borrow over this certain amount, they’re not authorized to borrow after that. And so they have to raise the ceiling.”

U.S. Treasury officials say the government would quickly run out of cash and could default on its obligations if

Congress doesn’t approve an increase in the borrowing limit. U.S. Treasury bonds are a key part of the international financial system, and a default would have global repercussions. For that reason, many analysts expect the borrowing limit will probably be increased on time.

Scott said while it’s an important issue, a default is unlikely.

“If they did not borrow, that does not mean (they) can’t spend any more money,” he said. “It would just mean you couldn’t spend any more than you take in.

“What default really means is that the government can’t pay its debt holders, can’t pay the interest on its debt,” Scott added. “Here’s the thing: The total tax money that comes in is 12 times the amount that is needed to pay interest on the debt.”

Some government programs would have to be cut, though. While tax revenues would still be collected, the amount is unable to cover everything.

This would be in addition to the programs made unavailable because of the ongoing shutdown. However, Scott said he doesn’t think there is a long-term economic impact over the turmoil in Washington, D.C.

“Government workers, they were paid just before this all happened,” he said. “Their next payday is at the end of the month. So they won’t miss a payday because it will probably be resolved by then. There’s been a bill passed already, not signed by the president, but there’s been a bill passed saying we’re going to pay them back pay. So that’s not an issue.”

While there have been issues raised for various federally funded agencies, in the larger picture it’s not expected to have a long-term impact on the overall economy.

Terry Evans, president/CEO of Independence Bank of Georgia, said he has not noticed a change in people’s finances due to the shutdown. An extended shutdown may change the circumstances, though.

An extended period of people not receiving paychecks could lead to an inability to pay back loans or decrease debt, Evans said. “If we made a loan to somebody who is not being paid, of course that would create a problem.

“But as of right now, it’s not an issue for us,” he added.

People looking to sell or buy a house are likely feeling the more immediate impact of the shutdown, however. Some borrowers are finding it harder to close on their mortgages.

Some lenders are having trouble confirming applicants’ income tax returns and Social Security data due to government agency closures.

The delays could worsen if the shutdown continues and possibly undercut the nation’s housing recovery.

Evans said he wouldn’t expect a significant change if the debt ceiling is not increased, though there could be long-term consequences if the United States defaults on its debt.

“It affects the economy, which in turn affects us,” Evans said.

“I hope it doesn’t happen,” he added. “Everybody just feels like something is going to get done, and they’re going to go back and pay everybody. I just feel like it will get worked out. I’ve just got enough confidence in our government that this won’t happen, and hopefully they’ll start talking and will compromise on some type of solution.”

The Associated Press contributed to this report.


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